Q. I am under FERS and 43 years old. I have been working for the government for the last six years at the GS-13 level and plan to retire after age 71 after 34 years of service. I currently contribute the maximum to traditional TSP and have $370,000 in TSP (about 90 percent invested in C, S and I funds, and 10 percent invested in F and G funds). Even if I switch to a Roth TSP, I can still contribute the maximum allowed each year including the maximum catch-up contributions allowed. Under these circumstances, wouldn’t it be beneficial to switch to Roth TSP? I assume so for the following reasons:
- Because of maximum contributions every year, TSP balance could likely be large at the time of retirement (TSP calculator is estimating 3 million plus at a return of 5 percent). A large TSP balance would result in a large RMD. If I am under Roth TSP, I could save on taxes significantly on the RMDs.
- In old age, I might have to take large distributions, say, for unexpected large expenses related to health. These kind of large distributions could push me into a higher tax bracket or higher taxes. Under Roth, most of such large distributions would be tax free.
- Since I will have a pension (37 percent of final salary based on 34 years of service) and Social Security (about 33 percent of final salary) covering 70 percent of my pre-retirement income, and since TSP would be taxed in the highest tax bracket, by having Roth TSP I could save on taxes on RMDs.
A. It isn’t possible to determine, in advance, which will be better for you from the information you’ve provided. In other words, your arguments aren’t convincing — partly because they are based on flawed assumptions and partly because the future is uncertain. You can’t accurately predict your tax bracket or rate tens of years in advance. You should also compare the Roth TSP option to other alternatives. For example, at a 25 percent effective tax rate, contributing $10,000 to the Roth TSP is equivalent to contributing $7,500 to the Traditional TSP. So, for every dollar you consider contributing to the Roth, you should consider contributing 75 cents to the Traditional TSP and another 25 cents to a taxable investment account, for comparison purposes. It’s not too hard to contrive scenarios where the Roth contribution will hurt, rather than help you.